Saving

Personal Finance

Why Save Money?• Saving money is the cornerstone of a

strong financial game plan. Some of the main reasons to save include:– To meet a very specific goal (e.g., a

summer road trip with friends)– To be ready for the unexpected (e.g., car

repair costs)– To plan for a future goal (e.g., saving for

college or an apartment).

How Much to Save• Experts suggest saving at least 10% or

your income.• If you can’t save a lot, save a little.

Saving is habit forming.• Save for emergencies. You should

have three to six months of living expenses saved.

Ways to Save• First rule of saving:

• PAY YOURSELF FIRST!

• Don’t treat savings as the lowest priority, or you may never get around to it.

Look For Creative Ways to Shave Money off of Your Daily Spending

• Eat breakfast at home instead of buying a drink and muffin. $5 saved!

• Spend the afternoon in the park (FREE) instead of going to a fast food restaurant. $5 saved!

• Skip the movie theatre ($20, with popcorn and soda) and rent a DVD instead ($1 to $5.) $15 to $19 Saved!

WOW!!• That’s $25 or more saved in just one

day. • Now let’s see what can happen to $25

when it is deposited into a savings account.

How Saving Works!• Key Terms:

– Principal – refers to the amount of money you deposit in your account to begin saving.

–Withdrawal - is when you take money out of your account, thereby reducing your principal

– Deposit – is when you add money to your account and increase your principal

How To Save• The difference between saving money

in a jar at home and in a savings account at a bank is how your money GROWS!

At Home• Money grows only when you add

(deposit) more money (principal) to the jar.

Savings Account• Money not only grows when you deposit more

money, but also by accumulating interest.• Interest – money the bank pays you for leaving

it in your savings account.• It’s as if you are loaning the bank your money. • You give them your money to hold.• They pay you interest so your money grows.• They are able to use your money to fund loans

and investments to other people

Interest Rate• The percentage amount of your

principal that the bank agrees to pay into your account.

• Often referred to as APR or Annual Percentage Rate.

Two Types of Interest Rates

• Fixed – unchanging and guarantees the same percentage of interest.

• Variable – can go up and down and is usually determined by current economic conditions.

Two Types of Interest• Simple Interest• Compound

Simple Interest• a simple fee paid to you on your

principal, expressed as a percentage of the principal over time.

• How is it calculated?– Principal x interest x time = interest earned

Example• You open a savings account with

$1,000 at a 5% simple APR. What will you earn in interest in the first year?

• $1,000 x .05 x 1 = $50 interest earned every year.

Compound Interest• This is what makes your savings really grow!• A savings account earns interest every day.• Each time your interest compounds, it gets added

back to your account and becomes part of your principal.

• With more principal, the account earns even more interest, which continually compounds into new principal.

• It’s a powerful cycle that really adds up.

How it works• Interest can compound daily, monthly, or

annually.• After one year, the interest you’ve earned

($50) gets added to the principal for year 2.• $1,000 x .05 x 1 = $50 interest earned in

year one.• $1,050 x .05 x 1 = 52.50 interest earned in

year two.• For year three, you’ll start with the new

principle amount of $1,102.50

The Rule of 72• Want to know how fast your money will

double?• The rule of 72 is a fast way to estimate

how long it will take you to double yoru savings with compound interest.

• 72 divided by “interest rate” = number of years needed to double your money.

Types of Savings and how to choose one

• Liquidity – refers to how easliy or quickly you can withdraw money.

• High interest rate accounts often require that you do not withdraw any funds for a given amount of time and may charge you fees for doing so.

• Money in those types of accounts are less “liquid” than others.

Savings Account• Also know as a deposit account• Most basic way to start saving. • Available at most banks and credit unions.• You can make deposits and withdrawals either by

visiting your financial instition or by using and ATM card

• Can withdraw money anytime, but the interes rate on most savings accounts can be low.

• PROS: low risk, high level of liquidity• CONS: low interest rate

Checking Account• Deposit account for the purpose of providing

convenient access to your funds whenever and wherever you want them

• You deposit funds at your bank or using an ATM• You withdraw funds at your bank, at an ATM, or by

using a paper check or debit/check card in place of cash at a store

• Funds are immediately deducted from your account.

Checking Accounts• Some banks pay interest on the funds in your

checking account.• Interest rate is lower than that for a savings account• Many require a minimum balance in order to

maintain an interest rate and avoid banking fees.• PROS: low risk, high level or liquidity• CONS: low interest rate, usually requires a balance

to avoid fees.

Money Market Account

• Combines some of the best features of both savings accounts and checking accounts.

• You can earn interest on the principal in your account much like a savings account.

• Interest rate is higher.• You receive an ATM card and can make withdrawals

and deposits from any ATM in your account network for free.

• You can also write checks against the account, although many money market accounts limit the number of checks you can write each month.

Money Market Account

• Usually require a higher initial amount of principal and the account may charge you fees if the account balance goes below a certain limit

• PROS: better interest rates, high liquidity

• CONS: requires greater initial deposit, may have limited transfers/withdrawals

CD or Certificate of Deposit

• Savings option that is best suited to those who have funds that can remain completely untouched for longer periods of time

• Have specific fixed term (from three months up to five years or longer) and usually a fixed interest rate.

• PROS: higher interest rates, often insured by the government

• CONS: fees charged to you if you need to withdraw money before the term ends.